Nick Rowe writes a post glorifying Milton Friedman declaring that “we are all Friedman’s grandchildren” and that New Keynesian economics owes more to Friedman than to Keynes. He also takes some shots at John Kenneth Galbraith saying that he “lost” to Friedman. Nick is right. Friedman has influenced economics tremendously over the last 40 years and the world is slowly digging its way out of his mistakes. After all, while Friedman might have won the economic battle of the 70’s, he’s losing the economic war.
First, Rowe’s shot at JK Galbraith is misleading. Galbraith was a Keynesian. Friedman’s battle wasn’t with Galbraith as much as it was with JM Keynes. But of course, Keynes wasn’t around to fight with Uncle Milton. And Friedman didn’t beat Galbraith or Keynes. After all, you don’t hear anyone declaring that “we’re all Friedmanites now”. Keynes has been and remains the most influential economist of all time.
More importantly, Friedman’s great contribution to economics was convincing the world that government is always bad and “free markets” are always good. Friedman’s entire theory was effectively an extremist ideology. He was a strict libertarian and someone who would always find data and theories that resulted in a “free market” approach to economics. Contrary to popular mythology, Keynes was actually quite balanced in his views and not only favored policy that was focused on helping to maximize business investment, but also promoted policy that increased government discretion during the bust and reduced it during the boom. Unlike Friedman, Keynes had an extremely balanced and bi-partisan approach to economics.
Most importantly, Friedman’s Monetarism has slowly died or has been rebranded. In fact, no serious economist even relies on Friedman’s models any longer. Monetarism, as Friedman envisioned it, doesn’t even really exist today. And the new version of monetarists, the Market Monetarists, only exist because they rebranded themselves as a new strain of Friedman’s work. But it’s the same basic anti government framework with a new central bank target.
Friedman’s Monetarism can be summarized as follows:
- Inflation is a greater concern than unemployment.
- Inflation is always and everywhere a monetary phenomenon.
- An independent Central Bank is the ideal policymaker.
- Free and unfettered markets are inherently stable and only fail when government fails.
- The Non-Accelerating Inflation Rate of Unemployment (NAIRU).
- The importance of expectations in macro models.
These ideas have all come under fire starting with the 1982 Fed rejection of monetary targeting. Then Alan Greenspan’s NAIRU barriers were consistently hit without any subsequent inflation. Then Central Banks consistently failed to hit their inflation targets. Then unfettered capitalism and rejection of understanding the importance of the financial system contributed to the financial crisis of 2008. And now the newest form of Monetarism in the form of Quantitative Easing, is failing to create growth and inflation in just about every economy it’s being attempted in. Central Banks just don’t appear to be the omnipotent policymaker that Friedman believed and most modern economists have yet to realize why.
Unfortunately, many strains of Friedman’s thinking are still highly influential in modern economics. The “New Keynesians” are indeed more Monetarist than Keynesian thanks in large part to Friedman’s influence. And the result is a continuing infatuation with Central Banks, inflation, “natural rates”, the quantity of money (primarily base money), magical targeting regimes and models based on the “expectations” of economic agents. And while much of this might appear logical and even empirical at times it remains, in large part, an economic model based on an anti government ideology instead of balanced bi-partisan thinking.
Unfortunately, Friedman has not yet completely lost this war and so the Monetarist experiment continues to this day. All the while millions of people remain unemployed, output remains severely depressed and we focus on the policies of Central Bankers because one man convinced the world that they could fix our economic woes when the reality is that this idea has turned into a gigantic distraction to the implementation of world changing public policy.
Nick Rowe is right. Friedman won the battle. And we’re all worse off for it. Thankfully, Keynes will win the war.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.